Every three months we have to endure the burst of silliness known as earnings season. While I find great value in the quarterly snapshot of conditions at U.S. publicly-traded corporations I think they are given entirely too much weight in the buying and selling of shares.
I have serious concerns about the social and economic impact of running a large company to meet short-term goals. I think that all the trading activity around the quarterly number is not all that healthy for the individuals indulging in this type of speculative activity. But as an investor I have to be aware of and be ready to react to the fact that many billions of market capitalization is going to be created or evaporate in the wake of these short-term reports.
Some of my best investments have been stocks that got hammered after a bad earnings report and dropped by 40% to 50%, or more. Often these are companies with attractive assets and they rebound nicely over the next few years. On the flip side of that I have seen many stocks roar higher after a good earnings report and reach valuation levels that are probably strong sell candidates.
As I was going through my screens and scans I found a few stocks that have had a good turn this earnings season, and it is probably time to say goodbye if you hold them. Those of you with an unbreakable addiction to short-term trading might want to watch them for a short set up as well.
The first one comes from what been my favorite group to pan over the decades. Casual dining chains are one of the least attractive businesses in the world. The margins stink, and if it can go wrong at some point in the restaurant business it will. I hate eating at them as the food is usually average at best and bland at worst. I simply do not understand the attraction of these places or these stocks.
While I love a good BBQ joint I am not a fan of the chains that have popped up around the country. I seem to be in the minority as Famous Dave's of America (DAVE) just reported a strong quarter and the stock has had a nice run. That headline of a 150% earnings increase looks great. But digging a bit deeper shows that same store sales actually decreased year over year by almost 5% at company-owned stores and more than 3% at franchised locations. I think growth is going to be very dependent on opening new stores more so than attracting new customers that spend more per visit.
I understand the chain has its fans, but the stock is ridiculously priced at the current level. The shares currently fetch 50x earnings and 23x the always highly -accurate analyst estimates. The price-to-book is over 6 and the widely acclaimed price/earnings-to-growth ratio is 2.81, so it is tough to make even a growth at a reasonable price argument for the stock. It is probably time to let this one go if you own it and consider shorting the shares after the big run it has had in May.
Polypore (PPO) is another stock that has a good post-earnings run. Although the report itself was not all that great, the story stock crowd has seized on the idea that the company will have a relationship with Tesla (TSLA) in the new Gigabyte battery project.
The deal will probably happen as Polypore is the only provider of the membranes used in the lithium ion batteries anywhere close to Tesla's planned facilities. Construction on the plant won't be done until 2017 at the earliest, however, and full production is probably another year or two beyond that.
I don't see any reasonable justification for the stock to trade at 60x earnings and more than 3x book value. The company has a pretty good business and the outlook for batteries is good, but the shares have run too far, too fast in my opinion.
Both of these could end up as chicken shorts if I can find an attractive options spread. I do not short a lot and only use out spreads when I do so as to limit losses. I use a stop loss of zero and tray to buy the spread as far out as possible.
I view my tiny collection of chicken shorts in much the same way I viewed my poker and racetrack money when I was a younger (and a single) man. If I win big that's fantastic, but losing is not going to change anything about my life or finances.